Global Value Fund (HWGAX)

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The performance data quoted represents past performance and does not guarantee future results. Current performance may be lower or higher. Investment return and principal value of the fund will fluctuate, and shares may be worth more or less than their original cost when redeemed. Click quarter-end or month-end to obtain the most recent fund performance.

Manager Commentary
Period ended June 30, 2018

 

MARKET COMMENTARY

After a small decline in the first quarter of 2018, the Russell Developed Index returned +2.1% in the second quarter and is now up +1.0% for the year, in US Dollar terms.  Local currency returns were higher (both US and ex-US developed markets returned between 3 and 4%) but were offset by a strengthening US Dollar.   The positive performance from global equities suggests that for the time being, investors are choosing to focus on strong corporate earnings as opposed to trade war risks and geopolitical tensions.  Global earnings grew more than +30% year-over-year in the most recently reported quarter, with more than 1,000 companies in the ~7,000 stock index reporting earnings growth of more than 50% from a year ago.  Interestingly, the composition of this fastest-growing cohort was broadly distributed across sectors even though stock performance across sectors has varied significantly. 

There were large deviations in performance by sector, with energy as the most notable standout returning more than +13% in the quarter with Brent crude prices rising +17%.  Financials were the biggest laggard, returning about -4% in the quarter with European banks declining disproportionately.  We remain overweight both of these sectors, though we trimmed some of the strongest performers in energy and added/increased exposure to two European banks and a large Japanese insurer that represent compelling valuation opportunities.  We have found few opportunities in emerging markets with attractive valuations for the risks at hand; this quarter, emerging markets returned about -4% in local currency and about -8% for a US Dollar investor. 

Growth stocks continued to outperform value stocks globally.  Growth outperformed value by about 4 percentage points in the quarter, by about 8 percentage points year-to-date, and by more than 10 percentage points over the past 12 months.  While we do not like to underperform our benchmark, which is core rather than value, we are generally pleased to have lagged by a modest magnitude over the past year considering the brisk headwind our value approach has faced.  Fortunately, markets move in cycles, and this headwind can shift into a tailwind when value comes back into vogue.

The global equity market’s valuation appears above average, but this is heavily influenced by certain market segments that we view as considerably overvalued. Valuation spreads are wide. In light of value’s underperformance, we are often asked what would serve as the catalyst to bring value back into vogue; unfortunately we do not have a definitive answer.  A rise in interest rates across the globe should favor value stocks, which are shorter duration instruments than growth stocks.  A global economic slowdown could favor value if the revenue/earnings projections for growth stocks fail to live up the rosy expectations embedded in the elevated valuation multiples.  Perhaps the “catalyst”, will be investors’ eventual recognition of the wide valuation disparity across equity markets, as has often been the case.  While the timing is uncertain, we are confident that the cycle will shift in favor of value once again.

The portfolio continued to trade at a considerable valuation discount the global index, positioning us well for when the growth/value cycle turns.  The portfolio trades at 7.6x normal earnings compared to 16.0x for the Russell Developed Index. The price-to-book value of the portfolio is 1.1x vs. 2.2x for the index.   

ATTRIBUTION: 2Q 2018

The Hotchkis & Wiley Global Value Fund underperformed the Russell Developed Index in the second quarter of 2018.  Positive stock selection trumped the value headwind in the quarter as energy, consumer staples, and real estate led the way.  The overweight exposure to energy also helped, as this was the top-performing sector for both the portfolio and the index. As noted above, global value underperformed global growth, which served as a headwind for our value focused approach. The largest individual contributors to relative performance were Whiting Petroleum, Ericsson, Discovery, Kosmos Energy, and Frank’s International. The largest detractors were WestJet, Societe Generale, Hewlett Packard Enterprise, Barclays, and Credito Valtellinese.   

LARGEST NEW PURCHASES: 2Q 2018

Tokio Marine is a property-casualty (P&C) insurer domiciled in Japan. The company is the 3rd largest P&C insurer in its home market, as measured by net written premiums. It also has a sizeable presence in North America resulting from several acquisitions completed over the past decade. We are attracted to the sustainable earnings power of Tokio Marine’s diverse insurance operations, the excess capital on the balance sheet, and the improving governance and financial performance. Stable margins and a focus on capital efficiency should drive an expansion in return on equity and deliver better-than-expected growth in earnings and book value per share. We believe, despite these attractive attributes, Tokio Marine shares trade at less than 0.75x book value and a single-digit multiple of normal earnings.

ING is the largest Dutch bank, providing retail and wholesale banking services to private clients, small businesses, large corporations, financial institutions, and governments. The Netherlands and Belgium account for 50% of revenue with the majority of the remaining revenue from elsewhere within Europe. ING is healthy: asset quality is good, the Company’s capital position is strong, and operations are profitable. ING trades at low multiples of current and normal earnings, and pays out more than 50% of its earnings.

Amerco, through its primary subsidiary U-Haul, offers truck, trailer, and self-storage rentals across its 22,000 locations in the US and Canada.  U-Haul, with more locations than all US rental car companies combined (10x larger than its next largest competitor), is the unrivaled US leader in “DIY” moving and storage.  In addition, the Company has significant optionality in its self-storage business and real estate assets.  We believe these advantages, combined with Amerco’s attractive valuation, make the stock compelling.

Mutual fund investing involves risk. Principal loss is possible. The Fund may invest in foreign securities which involve greater volatility and political, economic and currency risks and differences in accounting methods. These risks are greater for emerging markets. The Fund may invest in American Depository Receipts (“ADRs”) and Global Depository Receipts (“GDRs”) which may be subject to some of the same risks as direct investment in foreign companies.

Fund holdings and/or sector allocations are subject to change and are not buy/sell recommendations. Current and future portfolio holdings are subject to risk. Certain information presented based on proprietary or third-party estimates are subject to change and cannot be guaranteed. Portfolio managers’ opinions and data included in this commentary are as of 6/30/18 and are subject to change without notice.  Any forecasts made cannot be guaranteed.  Information obtained from independent sources is considered reliable, but H&W cannot guarantee its accuracy or completeness. Specific securities identified are the largest contributors (or detractors) on a relative basis to the Russell Developed Index. Securities’ absolute performance may reflect different results. The “Largest New Purchases” section includes the three largest new security positions during the quarter based on the security’s quarter-end weight adjusted for its relative return contribution; does not include any security received as a result of a corporate action; if fewer than three new security positions at quarter-end, all new security positions are included. The Fund may not continue to hold the securities mentioned and the Advisor has no obligation to disclose purchases or sales of these securities. Attribution is an analysis of the portfolio's return relative to a selected benchmark, is calculated using daily holding information and does not reflect the payment of transaction costs, fees and expenses of the Fund. Past performance is no guarantee of future results. Diversification does not assure a profit nor protect against loss in a declining market.

Investing in value stocks presents the risk that value stocks may fall out of favor with investors and underperform other asset types during a given period. Equities, bonds, and other asset classes have different risk profiles, which should be considered when investing. All investments contain risk and may lose value. 

 

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